VALUATION IN THE CONTEXT OF
FOREIGN GOVERNMENT EXPROPRIATION

Kim Scott

Law & Valuation
Professor Palmiter
Spring, 1999

Abstract
Text of Paper

Abstract
 
Governments may expropriate foreign assets in their territory provided that the expropriation is nondiscriminatory, done in the public interest, and just compensation is given.  However, there has been much disagreement over what qualifies as just compensation. In 1981, the Iran-United States Claims Tribunal was created to settle claims between U.S. claimants and the Government of Iran through arbitration. The Tribunal has adopted the full compensation standard for expropriations. A case where the Tribunal used the full compensation standard is Tavakoli v. The Government of the Islamic Republic of Iran.

ISSUE

 
How is the full compensation standard applied to foreign government expropriations?
 
RULE
 
The Tribunal values a company on the date of expropriation.  For a company, it must be determined whether it is a going concern.  If it is, then the principal assets and remaining assets and liabilities need to be valued and added together to determine the value of the company and thus the award for full compensation.
 
ANALYSIS
 
In Tavakoli v. The Government of the Islamic Republic of Iran, the Tavakolis brought a claim against Iran based upon expropriation of their interests in Western Industrial Group, which was incorporated in Iran in order to develop an industrial city. WIG was started to develop an industrial city, which was encouraged by the Iranian government because of the overpopulation of Tehran.  The government would help to direct new industries to the city.  The claimants sought almost four million dollars in compensation.  The court determined that Vivian Tavakoli was the only one that was a U.S. national on the date of the claim, and that she owned 170 shares in WIG, for which she should be awarded full compensation. The Tribunal then needed to value WIG on the date of the expropriation in order to determine the amount of compensation.
 
Tavakoli argued that WIG should be valued as a going concern, and that the book value of its assets should be adjusted to include their actual market value, and to include assets not listed on the books, thus making the 170 shares worth over $600,000.  She only wanted to be awarded her share of the net adjusted asset value, which is tangible assets minus liabilities. Iran contended that WIG was not a going concern when it was expropriated, and so should be valued at net book value, which would lead to a valuation of the 170 shares at almost $20,000.  Iran also felt that certain adjustments should be made to reflect WIG’s losses and the difficult circumstances that existed in Iran, which would lead to a negative valuation. The Tribunal agreed that Tavakoli’s approach was the most appropriate in valuing an interest in an expropriated company. Typically, the Tribunal had held that it was possible to assess the market value of a company, regardless of whether it was a going concern, because it was possible that the company’s assets would be acquired by another company. However, this was not likely in WIG’s situation, and that the value would be significantly decreased if not valued as a going concern.  Therefore, it needed to be determined whether WIG was a going concern.
 
According to the Tribunal, a going concern is a company that can continue to trade, in that it must have begun its operation by the date of expropriation and have a reasonable prospect of being able to continue operating after the Revolution. Iran argued that WIG had only suffered losses and therefore could not pay current liabilities. Tavakoli argued that the company was just starting and that the losses were due to massive spending on infrastructure.  The Tribunal found that losses over a number of years do not mean that WIG was not a going concern, since long-term companies in the beginning stages would have losses.  Also, it examined several adjustments, finding that WIG’s assets actually exceeded its liabilities.  Second, the tribunal needed to examine WIG’s prospects under the new regime. Iran argued that WIG would require substantial government funding and support as it was the first industrial city and that this support would be unavailable after the Revolution.  Tavakoli argued that since WIG was long term, that it would be able to recover once the political turmoil subsided. The Tribunal determined that the valuation of a company must depend on the facts in existence on the date of expropriation and not what may later happen, except to look at the long term prospects of the company.  Thus, the Tribunal concluded that WIG was a going concern on the date of expropriation.
 
The Tribunal then proceeded to value WIG as a going concern, first by valuing its principal assets and then the remaining assets and liabilities.  10 principle assets were determined.  First, the value of the land owned by WIG was valued, taking into account discrepancies in the claimed amount of land, the amounts paid for the land by Textile and Wool Companies, the differences between industrial and residential land, and the poor economic conditions in Iran.  Second, the right to electricity connection fees were valued, taking into consideration the connection fees charged by local power suppliers, the capacity of the substation, and the amount reserved and paid for, as well as the economic atmosphere of Iran.  Third, the shares of the Textile Company, Wool Company, and Printing Company that WIG owned were valued, with the Tribunal adopting the initial investment price as the value.  Fourth, WIG’s fees receivable for construction work were valued. Fifth, the trees planted and owned by WIG for landscaping and lumber sales were valued. Finally, the contract for supply of sugar beets were valued. Then the Tribunal went on to add the net value of the balance of WIG’s assets and liabilities by examining the balance sheets. It adjusted the figures to account for items that had already been valued with the principal assets.  Based on all of these calculations, the final award was determined as well as interest.
 
Valuation of a company in the context of expropriation is not typical.  First, economic conditions in the country following the expropriation need to be taken into consideration.  Second, the date of valuation is controversial, because expropriation usually takes place when there are political and economic difficulties, which can affect the value of a company.  Also, problems of proof can be abundant in such situations, leading the Tribunal to take an almost equitable approach with regard to the valuation.

Text
Valuation in the Context of Foreign Government Expropriation

All governments have the power to expropriate foreign assets in their territory provided that the expropriation is nondiscriminatory, done in the public interest, and just compensation is given.  Although the first two elements are relatively uncontroversial, the international community disagrees over precisely what “just compensation” is.  The United States has argued repeatedly that just compensation means “prompt, adequate and effective"' compensation, while the United Nations Charter of Economic Rights and Duties of States uses the expression "appropriate" compensation.[1]  Another source of disagreement is whether “just compensation” means “going concern” value or simply book value. The Iran-United States Claims Tribunal has addressed this issue while arbitrating claims between U.S. claimants and the Government of Iran.

 
The Iran-United States Claims Tribunal was created under the 1981 Algiers Accords which ultimately ended the hostage crisis in Iran, and has settled over five hundred disputes since 1981.[2] It was established to settle claims between U.S. claimants and the Government of Iran through arbitration. [3] Three Americans, three Iranians, two Swedes, and one Frenchmen were appointed by agreement as members of the Tribunal.[4] All nine members may sit en banc when arbitrating intergovernmental matters or issues of public concern, but sit more often as a Chamber composed of three arbitrators. [5] The Algiers Accords require U.S. claimants to forgo the pursuit of judicial remedies in U.S. courts and to pursue their claims instead in the Tribunal. [6] The government of Iran deposited $1 billion into a security account was established in August 1981, with the Dutch Central Bank as a fund from which claims would be paid. [7]
 
The Tribunal was granted jurisdiction to decide claims arising out of debts, contracts, expropriations or other measures affecting property rights, and disputes between the two governments concerning the implementation of the agreements.[8]  The Tribunal is governed by the rules set up by the U.N. Commission on International Trade Law (hereinafter UNCITRAL).[9]  Article 2(1) gives the Tribunal jurisdiction over claims arising out of "debts, contracts ... expropriations or other measures affecting property rights...." Article 5 instructs the Tribunal to decide claims: “ on the basis of respect for law, applying such choice of law rules and principles of commercial and international law as the Tribunal determines to be applicable, taking into account relevant usages of the trade, contract provisions and changed circumstances.[10] Although given great discretion in choosing the controlling law, the Tribunal generally applies public international law for claims of expropriation.  Article 5 of the Claims Settlement Agreement addresses the issue of the compensation standard for expropriations by adopting the full compensation standard.[11]  Although earlier cases avoided the task of defining “just compensation”, recent cases have consistently applied the Treaty of Amity and its "just compensation" standard of full compensation; and most decisions have affirmed that the standard of full compensation is the same under both the Treaty and customary international law. [12]  The following case is one example of the Tribunal’s attempt to award “just compensation”.


Vivian Mai Tavakoli, Jamshid David Tavakoli,
Keyvan Anthony Tavakoli, v. The Government of the Islamic Republic of Iran

Vivian Mai Tavakoli, Jamshid David Tavakoli, and Keyvan Anthony Tavakoli brought a claim against the Government of the Islamic Republic of Iran based upon the expropriation of their interests in Western Industrial Group [“WIG”][13].  WIG was incorporated in Iran in order to develop an industrial city near Kermanshah.  The claimants alleged that the Government of Iran deprived the shareholders of their rights by successively appointing both managers and directors of WIG, and seek US $3,830,585 in compensation, plus interest.[14]

The Tribunal first established that jurisdiction was present under Article II, paragraph 1 of the Claims Settlement Declaration [“CSD”], based upon a finding that WIG was expropriated by the Government of Iran on November 26, 1979. [15] Next, the Tribunal analyzed the nationality of the claimants.  It found that of the three siblings, only Vivian Tavakoli had dominant United States nationality by the date the claim arose. Therefore, the Tribunal proceeded to treat the case as though Vivian were the sole claimant [hereinafter, “claimant”].[16]  The Tribunal then proceeded to the issue of ownership of the shares, and after extensive fact finding, determined that Vivian owned only the 170 recorded in her name. [17] Finally, the court turned to compensation, considering it appropriate that she be awarded full compensation, and proceeded to value WIG as of November 26, 1979. [18]

The Factual Background of WIG used in the Tribunal’s valuation

Because of the Iranian government’s encouragement of industrialization and urbanization prior to the 1970s, Tehran experienced massive population growth which threatened major economic and social consequences.  The Iranian government began to prohibit industrial plants within a 20 mile radius of Tehran, and began to encourage development, particularly industrial cities, elsewhere.  An industrial city is “an industrial estate, the planning and construction of which must provide housing for at least 500 families. . . provide basic infrastructure – roads, water, power, etc. . .  In return, the Ministry of Industries and Mines, which was responsible for granting licenses permitting new factories to be established in Iran, would direct new industries to the city.”[19] Established in 1974, WIG was intended to provide support in establishing and developing industrial cities. WIG purchased land near Kermanshah to be used for an industrial city.  An Australian consulting firm, The Urban Collaborative [“TUC”] prepared a feasibility report and master plan in 1977 at WIGs request, and found the land near Kermanshah appropriate for an industrial city.[20] The report concluded that infrastructure alone for the industrial city would cost Rls. 440 million, and required government support and cooperation in order to be financially viable.  WIG began to develop the land by installing wells, electro-pumps, irrigation and drainage facilities, roads, and an electrical substation. At least three companies had established plants at the site by 1979.[21]

Method of Valuation

The court adopted as its starting point the 1981 Audit Institution report, which included the balance sheets for Wig of March 20, 1980, and March 20, 1981. [22]  The Claimant argued that WIG should be valued as a going concern, and that the book value of its assets should be adjusted to include their actual market value, and to include assets not listed on the books. Based upon this, the Claimant argued that the 170 shares were worth US $637,679.71.[23]  The claimant did not argue that the value should include future earnings, goodwill, or other intangibles.  She claimed only that she be awarded her share of the “net adjusted asset value”, equal to the value of WIG’s tangible assets, including physical assets, securities, accounts receivable, minus liabilities. The Tribunal agreed that this approach is the most appropriate in valuing a claimant’s interest in an expropriated company. [24]

The Government of Iran, Respondent, contended that WIG was not a going concern when it was expropriated, and so should be valued at net book value, but with adjustments to correct certain errors in the books which would render the value at a negative number.  But even without such adjustments, the Government of Iran contended that WIG’s net book value was only RLS 48,273, 966 (US $689,628).  The claimants 2.83% share would then be worth Rls 1,367,760 (US $19,539).  If adjustments were to be made, as the Government of Iran contended, the value must be adjusted to reflect WIGs losses and the difficult economic, social, and political circumstances in Iran.[25]

The Tribunal agreed with the claimant that her ownership should be valued at the net adjusted asset value.  Previously, the Tribunal had held that it was possible to asses the market value of a company without answering whether the company was a going concern because in those cases it was possible that the company’s assets could be acquired by another company. The Claimant’s expert witness had testified that WIG would not be able to find a similar company willing to exploit its assets, and that if WIG was not valued as a going concern, the value would be significantly decreased given the long-term nature of much of its assets. The Tribunal found that this case was unique because of the nature of the industrial city because it was unlikely that another company could be found to purchases the operation, and therefore proceeded to first determine whether WIG was a going concern.[26]

Whether WIG was a Going Concern

The Tribunal adopted a definition of going concern as “a company that can continue to trade, eg, has adequate funds for doing so”, and interpreted this to mean whether a company had begun operation by the date of its expropriation and, if it had, whether it had a reasonable prospect of being able to continue its operations after the Revolution.[27] F irst, the tribunal analyzed WIG’s current assets and liabilities.  The 1981 Audit Institution report stated that WIG’s accumulated losses totaled Rls 11,726,034 by March 1979 and Rls 13,043,049 by March 1980.  The Government of Iran argued that WIG had never turned a profit since its establishment in 1974, and since it had always suffered losses, could not pay its current liabilities out of current assets.  The claimant, however, contended that WIG was only in “start-up” mode, and that its business plan contemplated a 15 year span, in which the beginning years would see losses due to the massive spending on infrastructure and similar expenses.  On March 20, 1980, WIG’s balance sheet reflects current liabilities at Rls. 127,265,335 and current assets at Rls 30,703,322.[28]

The claimant asserts that the calculation of WIGs assets must take into account the transfer of ownership of WIGs construction camp to the Textile Company that had established a plant at the industrial city. This transaction was not taken into account in WIGs books, and represented a payment to WIGs from the Textile Company for the construction site, for construction supervision fees, and the release of WIG’s liability to the Textile Company.  With this adjustment, the claimant argued, WIG’s current assets exceed its liabilities.[29]  The Government of Iran did not address the impact of this adjustment on WIGs current assets and liabilities, but instead emphasized WIGs disproportionate liabilities. [30] The Tribunal concluded that “losses over a number of years do not of themselves indicate that WIG was not a going concern. As a long-term development company, WIG would have expected some losses in its early stages. These losses are not directly relevant to determining whether WIG’s current assets were sufficient to meet its current liabilities.”[31]  In addition, the Tribunal found that WIGs books did not reflect the value of the transaction for the construction camp and construction supervision work to the Textile Company, worth approximately Rls. 97,631,963 and Rls. 15,000,000.  Since a Rls 105,156,426 liability was also forgiven, WIG’s current assets become Rls. 38,178,860 and its liabilities Rls. 22,108,909.  Thus, the Tribunal found that WIGs assets exceeded its liabilities. The court also analyzed several other complex adjustments to the company’s assets and liabilities, but in the end concludes that on November 26, 1979, WIGs assets exceeded its liabilities. [32]

The second step in the Tribunal’s analysis of whether WIG was a “going concern” as of the date of its expropriation was an analysis of WIGs prospects under the new regime.  The Government of Iran argued that because WIG’s project was the first industrial city financed by private funds and because no industrial center had previously existed near Kermanshah, the WIG project would require substantial governmental funding and cooperation.  The Government also argued that after the Revolution, such support would not exist because the Islamic Revolution sought to increase agricultural production and diversify and increase non-oil exports. [33]

Conversely, the claimant argued that “while the revolutionary conditions in Iran are relevant to a valuation of WIG, one must distinguish between companies ruined by the valuation and those that suffered but would have been expected to recover once the political turmoil subsided.”[34]  She also argued that WIG had been a long-term project, and that any immediate effects of the Revolution would have little impact on WIGs long-term value and that the Islamic Regime after the Revolution supported and even protected WIG and its affiliated companies.  The Tribunal concluded that “[a]lthough there is evidence that WIG and its affiliates continued to exist after 1979, the valuation of a company on the date of its expropriation must be grounded on facts known at that date and may not take into account evidence of later developments which could not have been known then.” [35]  Citing a previous expropriation valuation case, it stated that “in valuing a company during the Revolution it is necessary also to look at the long-term prospects that the company would have been expected to enjoy.” [36]

The Tribunal noted that the Revolution had started in 1978 and ended on February 11, 1979, and that the uncertainties and economic conditions associated with the Revolution forced WIG and its affiliated companies to cease activity, but that the Revolution was temporary. The new Government had indicated by November 1979 that its policies were radically different than those of the Shah regarding industrialization, urbanization, trade and foreign investment, placing more emphasis on agriculture and traditional economies, and exercising more control over the economy.  The Tribunal found that while such factors would have a negative effect on any business, it was not evident that WIG had ceased to be a going concern.[37]  Thus, the Tribunal concluded that “during most of 1979 WIG continued to have business prospects that were positive, albeit not as promising as they had been prior to the Revolution.” [38]

Based upon the findings regarding WIGs balance sheets and its business prospects after the Revolution, the Tribunal concluded that WIG was a going concern as of the date that it was expropriated.  It then proceeded to value WIG as a going concern, i.e. an ongoing industrial city project, while taking into account the effects of the Revolution on Iran’s economic environment. It first valued WIGs principal assets, then WIGs remaining assets and liabilities. The decision listed WIGs principle assets as: (1.) Land; (2.) rights to charge electricity connection fees; (3.) shares held in the Textile Company; (4.) shares held in the Wool Company; (5.) shares held in the Printing Company; (6.) fees receivable for construction work; (7.) fees for future construction work; (8.) a housing project; (9.) a plantation of trees; (10.) a contract for the supply of sugar beets.[39]

The Valuation of the Principal Assets

The parties stipulated that WIG held 3.797,793 sqm of land.  In valuing the land owned by WIG, the Tribunal relied on the TUC report, analyzing the number of hectares available for residential development and the areas required for infrastructure purposes and not available for sale. [40]  However, the report was based upon WIG owning 3,930,000 sqm of land.The parties disagreed as to how to allocate the land given this discrepancy. The Tribunal referred to a previous case, and stated that:

. . . the Tribunal will make is best approximation of the value of the . . . proprietary interest therein based on the best possible use of the evidence in the record and taking into account all the circumstances of the case. . . while a Claimant must shoulder the burden of proving the value of the expropriated concern by the best available evidence, the Tribunal must be prepared to take some account of the disadvantages suffered by the Claimant, namely its lack of access to the detailed documentation, as an inevitable consequence of the circumstances in which the expropriation took place.[41]
A difference existed between the TUC Report and the actual land owned by WIG, as stipulated by the parties.  The Tribunal adopted what it considered the fairest method for determining how much land would be used for each purpose given the disparity this disparity by reducing all the TUC Report land-use figures proportionally to the total land actually owned by WIG. [42]  The Tribunal then subtracted the amount of land sold by WIG prior to the Revolution.  The Tribunal accepted the amounts paid for the land by the Textile and Wool Companies as the value of the land because of the presence of independent board members. The Tribunal found that the Textile Company had paid Rls. 200 per sqm of general industrial land and that the Wool Company had paid 300 per sqm for light industrial land. The Tribunal accepted these prices as the going price for general industrial land and light industrial land for all the property held by WIG.[43] The claimant argued that this amount should be adjusted for inflation to 400 Rls for general industrial land and 600 Rls for light industrial land, and the Tribunal accepted that valuation.[44] The Tribunal next turned to residential land, and considered that by November 1979 there was little development in the residential areas.  It adopted 50 Rls. as the average value of the residential land. It arrived at this figure by accepting the Respondent’s contention that agricultural land was worth between 15 and 25 Rls. per sqm, and that agricultural land was worth slightly less than residential land.[45] The Tribunal valued the land at a total value of Rls. 872,659,700.[46]

The Tribunal discounted this value to reflect the poor economic conditions in Iran due to the Revolution, including the less promising outlook for industrial activity.  The Tribunal stated: “[e]ven taking account of the project’s longer term prospects, a reasonable purchaser at the time would have assumed either that less of the land would have been sold, that it would have to have been sold for a lower price or that it would have taken longer to sell.”[47]  The Tribunal discounted the value of WIGs land 20%, to Rls. 698,127,760.[48]  The Tribunal also applied a fee and commission of 10% of the value of the land, normally applicable to any sale of land in Iran, making the total value of the land Rls. 628,314,984.[49]

The Tribunal then valued the right to electricity connection fees, which resulted from WIGs purchase of a high voltage electrical plant and construction of a substation. [50]  The Tribunal found that the connection fee charged by the local power supplier was Rls 10,000 per KW, that WIG was given the right to charge a similar fee by the Ministry of Power, and that WIG’s substation included two 15,000 KW transformers.  Interestingly, the Tribunal held that although the record was scarce concerning the exact capacity of the substation, the Respondent had been in control of the substation, and was presently in control of the substation. For this reason, it had the burden to disprove the Claimant’s contention that the substation had a 30,000 KW capacity, which it had not done. Therefore, the Tribunal accepted the Claimant’s alleged capacity of 30,000 KW. [51]  The Tribunal found that 12,000 KW had been reserved and already paid for by the Textile Company, 1,500 KW had been reserved and already paid for by the Wool Company; and 500 KW had been reserved and paid for by the Printing Company, so that WIG retained the right to receive connection fees for 16,000 KW at a fee of Rls. 10,000.[52]  Again, the Tribunal discounted this value to account for the economic atmosphere in Iran after the Revolution and the fact that other industrial plants would likely be delayed. Therefore, the present value to WIG of the potential fees was 20% of Rls. 160,000,000, or Rls. 128,000,000.[53]
WIG also owned 11%, or 4,000 shares, in the Textile Company, which it purchased in 1974 for Rls. 40,000,000.[54]  The claimant argued only that the value of WIGs interest in the Textile Company was equal to the value of its investment, Rls. 40,000,000. The Respondent argued that the investment was worthless because of the financial conditions of the company.[55]  The Tribunal determined that by early 1979 the Textile Company was ready to begin production, and refused to discount WIG’s shares due to financial problems in the company as Respondent alleged because Respondent was in the position to provide such evidence and had not done so. [56]  Moreover, the Tribunal refused to consider the fact that the Textile Company needed to raise money and had failed to do so through its shareholders. It stated that “[I]t is normal commercial practice to borrow money as well as raise capital.  It is understandable that the Textile Company may not have been able to raise money from its shareholders, which included the Iranian Government, in early 1979.”[57]  The Tribunal valued WIGS shares in the Textile Company at Rls. 40,000,000, as the Claimant had alleged, because prior Tribunal decisions had valued companies in a similar position, that is, in an advanced state of preparedness but not yet operating, as equal to the initial investment. [58]
WIG also owned a 19% interest in the Wool Company, for which it paid Rls. 19,000,000 in 1975.  Again, the claimant valued her interest in the company at the initial investment price.  The Respondent again alleged financial difficulties made it the investment worthless.   The Tribunal again adopted the Claimant’s valuation, ignoring the Respondent’s contention that the investment was worthless because the Respondent had not “provided any details or evidence supporting its allegations in this respect, despite apparently being in a position to do so.”[59]
WIG also owned a 9.1% interest, or 320 shares, in the Printing Company, which it purchased for Rls. 3.2 million in 1977. The Claimant valued its interest at U.S. $200,000.[60]  The Respondent alleged that the investment should have been written off because the Printing Company was in an “improper financial position”, its Managing Director had resigned, and it had been taken over by “Kermanshah Jehad Sazandegi”.[61]  The Tribunal ignored both parties contentions and valued the investment at its original purchase value, Rls. 3,200,000. [62] The Respondent also alleged that any valuation should be discounted because of the interest’s lack of marketability and its minority shareholder status.  The Tribunal, following previous Tribunal decisions, stated that “while such considerations may be relevant in valuing a shareholding for the purposes of sale on the open market, they have no application in the context of an expropriation.”[63]
The Tribunal next turned to WIG’s fees receivable for construction work, and valued them at Rls. 10,045,680.[64]  As for the valuation of future construction work, the claimant alleged that “WIG anticipated that it would supervise, over a five year period, further construction projects costing about U.S. $35 million”. WIG’s anticipated fee would be US $2.1 million, with expected profits at U.S. $392,700.[65]  The Respondent contended that WIG had sold its construction camp, which was previously valued, and therefore could not complete future construction work. The Tribunal determined that the claimant had not met her burden of establishing any amount in respect for future construction fees given the absence of evidence regarding the future contracts and the sale of the construction camp.[66]
The claimant also alleged that WIG had spent U.S. $200,000 to construct two four story apartment buildings which had been abandoned due to unsafe working conditions during the Revolution. The claimant alleged only the value that had been spent in constructing the apartment building, and did not claim any future profits from rental revenues.  The Respondent alleged that it was merely part of the construction camp that had previously been valued.  The Tribunal determined that due to the lack of proof that the apartment building was not part of the construction camp, claimant did not meet her burden of proof and the Tribunal refused to include the value of the apartment building.[67]
The next asset to be valued by the Tribunal was the Trees planted and owned by WIG that were intended for both landscaping and lumber sales. The Claimant alleged that WIG planted 300,000 spruce, oriental plane trees, cedar, and poplar trees, and that 90% were for sale and 10 were for beautification.[68]  The claimant also alleges that the trees would be worth in 7 years, $10 a piece, and that WIG had received offers for US $5 to $7 a piece prior to the Revolution.  This would total U.S. $1,800,000.  Her expert performed an industry analysis and reported that a reasonable value for the trees in 1980 was U.S. $13 per tree, which according to the claimant proves the reasonableness of her $10 per tree valuation.  The Respondent alleges that the trees were planted as seedlings and not all of the trees would eventually be of good enough quality or survive to be sold as lumber. Moreover, the Respondent alleged that only 25,000 of such trees could physically be planted on 2.2 hectares, the land that was allocated to the lumber by WIG.  The Tribunal determined that although it was clear that trees had been planted, neither side could present the Tribunal with evidence as to exactly how many trees were actually planted.  The Tribunal ultimately adopted the value of U.S. $800,000 for the trees, the figure that the claimant at one point had stated that WIG had lost from the expropriation of the trees, and did not accept her valuation of $10 per tree or the Respondent’ valuation of the cost of WIGs investment in the Trees.
Finally, the Tribunal turned to the valuation of the WIGs alleged contract for the supply of sugar beets, but found that the claimant had failed to satisfy her burden of proving that WIG had engaged in a bee-growing venture prior to the date of expropriation.[69]
Net Value of the Balance of WIGs Assets and Liabilities
The Tribunal then proceeded to add the net value of the balance of WIGs assets and liabilities.  The Tribunal first analyzed the March 20, 1980 balance sheet, which showed WIGs assets and liabilities to be as follows:[70]
Current Assets Rls. 83,696,673
Current Liabilities Rls. 32,515,535
Fixed Assets Rls. 81,213,964
Capital Investments Rls. 62,305,000
Because some of the principal assets valued above were included in the balance sheet figures, the Tribunal excluded the book value of those principal assets, and assessed the remaining changes due to the 1981 Audit Institution’s report that the figures for fixed assets and capital investments be reduced. As for fixed assets, the Tribunal reduced the value of WIGs fixed asset account to Rls. 583,628 to account for the previous valuation of the land, electric substation and trees, and amounts transferred to Textile Company as part of the Construction Camp.[71]  That Rls. 583,628 related to transport vehicles and tools, which “in the absence of more specific evidence, and considering it probably that at least the tools would have formed part of the construction camp”.  For these reasons, the Tribunal reduced WIGs fixed assets to zero.
The Tribunal reduced WIGs capital investments by Rls. 62,2 million, which represented the book value of WIGs shares in the Textile, Wool, and Printing Companies, which had already been valued. [72] This left Rls. 105,000 in WIGs capital investments, which reflects WIGs interest in the Western Trading Company. The Tribunal retained the 105,000 capital investment value because there was not adequate evidence to prove that as of the expropriation the company had no value.[73]  This created a total of Rls. 51,286,138, which represented the net value of WIGs remaining assets and liabilities, which was then added to the value of the principal assets, Rls. 828,560,664, plus U.S. $800,000.[74]
The Total Value of WIG and the Award
The total net value of WIG was Rls. 879,846,802 plus U.S. $800,000 as of the date of expropriation, November 26, 1979. Vivian Tavakoli’s 170 shares, or 2.83% interest, is valued at Rls. 24,899,664 plus U.S. 22,640.[75]  The Tribunal also awarded Vivian Tavakoli simple interest at 8.1%, the average rate of interest paid on six-month certificates of deposit in the U.S. from November 26, 1979 until the present.[76]
Conclusion
The valuation of a company in the context of an expropriation raises many issues not present in a typical valuation.  First, there is the issue of the economic conditions in the country following the expropriation.  As in the case of the Tavakoli expropriation, the economic conditions after the revolution were worse for companies such as WIG.  Should this be taken into account given that the government was the party that expropriated the company and arguably the government is in control of the economic situation in the country?  The Tavakoli Tribunal discounted the value of WIG’s land to reflect the poor economic outlook in Iran following the Revolution.  Throughout the opinion, there are indications that the Tribunal is considering the policies of the new government and the more negative economic conditions following the Revolution.
Another issue relates to the date of valuation. Clearly, if the valuation is done as of the date it was expropriated and other expropriations are taking place, few investors would be willing to invest in a country that is currently expropriating investments.  The Tribunal in Tavokoli used the “reasonable investor” when deciding to apply a discount to the value of WIG’s land, finding that “[e]ven taking account of the project’s longer term prospects, a reasonable purchaser at the time would have assumed either that less of the land would have been sold, that it would have to have been sold for a lower price or that it would have taken longer to sell.”[77] Most likely, the expropriation is taking place in a time of political, social, or economic difficulties, which cannot be separated from the value of the company.
Another issue relates to the “minority shareholder discount” and a discount for lack of marketability. The Tribunal in Tavakoli indicated that such a discount was inappropriate in the context of an expropriation valuation. This seems appropriate because expropriations are fundamentally different than a sale of a fraction of the shares of a company, because the government has taken control of the company, and eliminated the minority interest.
Many of the difficulties faced by the Tribunal were problems of proof.  Very often the parties alleged amounts that could not be proven. The claimant was clearly in a weak informational position, as a minority shareholder in a company that had been expropriated almost twenty years earlier. The Tribunal appeared to almost adopt equitable principles when deciding the valuation of many of WIG’s assets.  The Tribunal noted the issues on which Respondent controlled the access to information, yet had not produced any evidence either of its point or to rebut the claimants, and seemed to shift the burden of proof to the respondent to rebut the claimant’s allegations on those issues.
 

 
There were several points at which I disagreed with the Tribunal’s determination. First, the Tribunal assessed a 10% discount on the value of WIG’s land, representing the average cost of fees and commissions when selling land in Iran.  An expropriation is hardly a willing sale by a buyer and seller at arms length. I thought it inappropriate that the claimant should be forced to pay the 10% commission when she had no intention of parting with the land had she not been forced to do so.  I also was not satisfied by valuation of the claimant’s shares in the Textile Company, Wool Company, and Printing Company. The Tribunal valued the interests at what WIG has originally purchased them for.  The investments had been made four to five years earlier.  Although I do not know precisely what the inflation rate in Iran was in the years before the Revolution, even a modest inflation rate would affect the value of the original investment.  I do not understand why the claimant did not at least argue for this adjustment.
 
 
Finally, I disagree with the Tribunal as to the discount due to the economic and political conditions in Iran after the Revolution.  The Tribunal adopted a 20% discount rate without explanation beyond the fact that a reasonable investor would agree that less land would be sold or it would take longer to sell the land.  This is primarily troublesome because of its arbitrariness.  The Tribunal uses the discount rate to reflect the risks present after the Revolution.  There are, however, more precise ways to measure the risk of investing in a country whose economic and political conditions are unstable.  For example, the Tribunal could have used CAPM to measure risk, or could simply have looked at how risky investors at the time considered Iran or other countries with unstable economic and political conditions.  Clearly, an investor who is contemplating investing overseas must take into account the political risks, as well as economic risks.  While there is no doubt that the Revolution did affect the business prospects of WIG, the Tribunal surely had available less arbitrary means of assessing that risk.
 
The Tribunal ultimately awarded the claimant the net adjusted asset value of her investment in WIG, which it considered the appropriate “going concern” value and just compensation.  The valuation of companies expropriated by foreign governments is difficult because it involves different perspectives on governmental responsibility and fairness.  The Iran-United States Claims Tribunal in the Tavakoli and other decisions has begun to establish that just compensation includes “going concern” value.  To the extent that the Tribunal contributes to the evolution of public international law, the Tribunal’s decisions will act as precedent for future valuations following expropriations.

 

[1]  Monroe Leigh, Nationalization—Standard of Compensation— “Going Concern” Value. 78 Am. J. Int'l L. 454, 454. United Nations Charter of Economic Rights and Duties of States (1984) GA Res. 3281 (XXIX) (1974).
[2] David J. Bederman, John W. Borcert. Abraham-Youri v. United States, 139 F.3d. 1462. 92 Am. J. Int’l L 533, 533 (1998). The January 19, 1981 agreements are reprinted in 75 AJIL 418 (1981) and 20 ILM 223 (1981).
[3] John R. Crook Applicable Law in International Arbitration: The Iran-U.S.Claims Tribunal Experience. 83 Am. J. Int'l L. 278, 279 (1989).
[4] Arthur Rovine , Richard B. Lillich, Lee R. Marks , Jay L. Spiegel, Iran/United States Claims Tribunal. 76 Am. Soc'y Int'l L. Proc. 1, 1 (1984)
[5] 83 Am. J. Int'l L. 278, 286
[6] 83 Am. J. Int'l L. 278, 282
[7] 76 Am. Soc'y Int'l L. Proc. 1, 3
[8] Id., at 2.
[9] Id., at 2.
[10] 76 Am. Soc'y Int'l L. Proc. 1, 6
[11] Id., at 8. This standard was adopted in the Treaty of Amity, Economic Relations, and Consular Rights with Iran, Aug. 15, 1955, art. 4(2), 8 U.S.T. 899, T.I.A.S. No. 3853, 284 U.N.T.S. 93., and the Claims Settlement Agreement incorporates this standard.
[12]  83 Am. J. Int'l L. 278, 301
[13] Iran-United States Claims Tribunal, Iran Award 580-832-3 (1997).
[14] Id., para 1.
[15] Id., para 12.
[16] Id., para 47-49.
[17] Id. para 73.
[18] Id., para 75.
[19] Id., para 77.
[20] Id., para 79, 80.
[21] Id, para 84, 85.
[22] Id., para 88. The balance sheets record assets and liabilities at their historical purchase price, less depreciation where appropriate.  There is no indication in the decision as to precisely what the “Audit Institute” is, nor precisely what the report entails, beyond the balance sheets and other information about the company, which is discussed below.
[23] The Claimant hired Hemming Morse, Inc, to prepare a valuation report. The report concluded that WIG was worth US $22,392,190.  Hemming Morse then modified its number at the hearing to $22,532, 852.  The claimant’s 170 shares represent 2.83% ownership, or $637,679.71.
[24] Id., para 92.
[25] Id., para 91. The Government of Iran hired Touche Ross & Corporation and a group of Iranian experts to value WIG, and valued only WIG’s land and trees at US $1,566,428.43, with the claimant’s share at $44,329,92.
[26] Id., para 94.
[27] Id., para 95. The parties argued that “going concern” meant whether the company’s current assets exceeded its current liabilities so that it is capable of meeting its liabilities as they fall due and realizing its assets in the ordinary course of its operations.
[28] The Tribunal accepted the March 20, 1980 balance sheet as representing WIG’s book value on November 26, 1979, the date when it was expropriated, because both parties relied on the statement and because there was insufficient information to determine WIG’s book value on November 26, 1979.
[29] Id., para 100.
[30] Id., para 101, 102.
[31] Id., para 103-104.
[32] Id., para 114.
[33] Id., para 116, 117.
[34] Id., para 118.
[35] Id., para 123.
[36]  Id., para 124.
[37] Id., para 125, 126, 127.
[38] Id., para 128.
[39] Id., para 129, 131.
[40] Id., para 132..
[41] Id., para 145.  Citing Birnbaum, Award No. 549-967-2, para.49 (6 July 1993), ---Iran-U.S.T.R. at ---. and Sola Tiles, para 52, 14 Iran-U.S.T.R. 223, 238.
[42] Id., para 147.  First, the Tribunal divided 3,797,793 by 3.930,000, which resulted in 0.96636.  It then multiplied each of the allocated areas by this number to reach the adjusted area. Id., at footnote 13.
[43]  Id.,para 149, 151, footnote 14.  The Tribunal accepted that the prices for this land would be uniform because the parties made no arguments as to whether and how the prices would vary across the site.
[44] Id., para 152.
[45] The Tribunal ignored the claimant’s contention that the residential land was worth Rls. 244 per sqm because it found no evidence of any sale that would support that valuation. Id., para 153.
[46] Id., at para 154.
Use                            Area            Value(Rls/sqm)    Total Value
light industry            955,687        600                        573,412,200
general industry       693,761       400                         277,504,400
residential                  434,862         50                           21,743,100
TOTAL                    2,084,310                                     872,659,700
[47]  Id., para 155.
[48]  Id., para 156.
[49] Id., para 157.
[50] Id., para 158.  Neither of the parties included the value of the substation in their valuation of WIG because it may have been transferred to a local power company before the date of expropriation.  Nevertheless, the claimant contended that WIG retained the right to new users a connection fee.
[51] Id., para 172.
[52] Id., para 175.
[53] Id., para 176.
[54] Id., para 177.
[55] Id., para 178.
[56] Id., para 182.
[57] Id., footnote 16.
[58] Id., para 183.
[59] Id., para 188.
[60] Interestingly, the Claimant alleged that in 1978 the Printing Company had received an offer to sell for Rls. 100,000,000 or 120,000,000 from the Managing Director of the Royal Organization for Social Services.  They contended that the company could not refuse the offer because the Managing Director was a member of the Royal Family and had been granted a monopoly on printing.  The Printing Company had instead made a counter offer of $200,000, but had not heard back from the Managing Director because the Revolution had occurred. The Tribunal refused to accord any weight to this valuation because the Claimant could produce no evidence of the offer or counteroffer. Id., para 192, 197.
[61] Id., para 193, 194.
[62] Id., para 199.
[63] Id., para 198.
[64] Id., para 207.
[65] Id., para 208.
[66] Id., para 212.
[67] Id., para 217. The Tribunal also seemed troubled by the fact that the claimant had increased the amount that she claimed the apartment building was worth without any explanation.
[68] Id., para 219.
[69] Id., para 239. The Tribunal determined WIGs principal assets to be:
Land                                                            Rls. 628,314,984
Connection Fees                                               128,000,000
Textile company shares                                     40,000,000
Wool Company shares                                      19,000,000
Printing Company Shares                                    3,200,000
Construction fees receivable                            10,045,680
Fees for future construction work                                   0
Apartment building                                                           0
Trees                                                                         800,000
Sugar Beet project                                                             0
SUB TOTAL                                            Rls. 828,560,664
                                                                         U.S.$ 800,000
[70] Id., para 242.
[71] Id., para 243.
[72] Id., para 244.
[73] Id., para 246.
The modified balance sheet, reflecting these adjustments:
Current Assets            Rls. 83,696,673
Current Liabilities                32,515,535
Fixed Assets                                        0
Capital Investments                   105,000
SUB-TOTAL                        51,286,138
[74] Id., para 247.
[75] Id., para 248, 249. Rls. 24,899,664, based upon the exchange rate during 1979 of 70.475 Rials to U.S. $1, is equal to U.S. $353,312. Her aggregate amount in U.S. dollars equals $375,952.
[76] Id., para 250. The Tribunal also awarded Vivian Tavakoli costs associated with the arbitration
[77] Id., para 155.